Commentary and analysis on markets, personal finance, and wealth building from a contrarian perspective. "I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting there and trying to dream it up all yourself. Nobody’s that smart."
— Charlie Munger

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Sunday, September 13, 2015

Contrary to media hype US oil production is going down

If you believe all the recent stories about
how Saudi Arabia is losing the
price war it started against U.S. tight oil producers last year, the new Oil
Market Report from the International Energy Agency offers
a reality check. The Saudis are winning, though they're paying a heavy
price for it.

The narrative about U.S. shale's resilience in the face
of the Saudi decision to drive up production, prices be damned, centers
on the American industry's ability to cut costs and use innovative
technology to repel the brute force onslaught. There is a kind of David versus
Goliath charm to this story, but the data don't bear it out. The IEA, the
world's most respected independent source of information about the oil market,
has changed its methodology for measuring U.S. output: It now polls
producers, instead of relying on data from states. And the switch has caused
the agency to revise production data for the first half of 2015, showing a
noticeable slowdown.

If anyone actually did a deep dive one would have noticed that most of the "shale revolution" was not based on new technology, or as one noted author wrote "Moore's Law applied to oil production", but cheap money and high oil prices. The fact is most of these shale players were never even cashflow positive at $100 per barrel. Now that the steep depletion is setting in on these shale wells there is not a willingness by lenders to continue to fund negative cashflow businesses. There are areas in the US where shale oil can be produced profitably at these prices but they are small compared to the media hype. What we are seeing is the Saudi plan working and the interesting thing to note will be at what price do we see equilibrium. The whole shale business was a Red Queens race funded by cheap and plentiful credit. The credit spigot is now shut and I expect oil production in the US to continue to decline.